Overall, a lockdown in India is a good idea. Its healthcare infrastructure cannot handle even the flattest of curves, so social distancing not only flattens the curve but buys the government and private sector three weeks to increase capacity. In developed countries like the US, where capacity is high, the economic cost of shutdown is also high. But in India, the economic cost of a shutdown is lower, and the cost of a collapse in healthcare capacity because of premature stress is very high. So a lockdown in India makes sense for its conditions.
There are a few things to keep in mind to make this lockdown a success.
First, the Indian government needs to rely on its private sector healthcare infrastructure, which is many times larger in capacity and services than the government provided free/subsidized healthcare. There are 10 times more doctors in India working in the private sector than government hospitals. Especially in urban areas – where the initial outbreaks are most expected and feared – private healthcare functions very well. The government should pay for the testing and treatment of the poor and those who cannot afford, and allow those who can pay to directly get those services. During emergencies, there is a temptation to requisition private capacity, which in this case will only impose stress on the healthcare infrastructure. The government should pump a lot of funds into the health sector, but allow the private sector to provision and increase the number of beds, health workers, ventilators, masks etc. The current allocation of 150 billion rupees (about 2 billion USD) announced by Modi is too little. It’s about $1.5 per Indian. This amount needs to be increased many times over. The returns in terms of saving lives immediately, and improving healthcare infrastructure will be worth it in the long term.
Second, the government must resist the temptation to impose price controls and quantity controls and let the markets work. India has very local supply chains and all essential goods, mainly food and dairy, will be available easily. Price controls during a lockdown will only exacerbate the problem. A price is a signal wrapped up in an incentive. It signals shortages and surpluses and it also incentivizes buyers and sellers to adjust their behavior. Government imposed price controls must be avoided completely. India has banned exports of medical essentials like masks and ventilators, which is currently justified and sufficient. Indian entrepreneurs will respond to the emergency if prices are allowed to function and the dreaded Essential Commodities Act, which has significantly distorted prices in the past, and unintentionally prevented essential goods from reaching people, is kept at bay.
Third, India has lifted hundreds of millions out of poverty, but still has about 275 million living below the poverty line i.e. less than $1.25 a day. In addition to these, another 300 million are highly vulnerable to economic stress. 70% of Indians work in the informal sector, on short contracts, usually daily or weekly wage, and will have no income with a 21-day lockdown. Even after the lockdown is lifted, sectors like construction may not revive immediately. India needs to announce some kind of quasi universal income, or subsidy that is not means tested, for at least 700 million of
its 1.35 billion population. A minimum of at least Rs 2,500 a month (which is the Indian poverty line) to keep these Indians at home, and not desperate, is essential. If this has to be continued for three months, it would amount to ~2.6% of GDP. This is a stimulus which India can, under these circumstances, afford, and without which millions of poor may die because of the lockdown and not the pandemic. Without this, the chances of the success of the lockdown is low. It will also soften the aggregate demand contraction which is inevitable during a 21 day lockdown.
Finally, assume goodwill. There is a tendency to pass draconian measures in an emergency to punish the few hoarders and scamsters in any situation. The problem with bad laws that are only designed to prevent scamsters, whether it is for hospital funding, UBI-like subsidies, or removing price controls, is that it creates bad incentives for others, and discourages provisioning of goods and services by others, mostly operating on good faith. And the cost of punishing the scamsters in this emergency is too high. Assume some small percentage of people will take advantage of all this, and carry on.
The lockdown is the first step. But India must not squander the next 21 days, and prepare on a war footing to increase its healthcare infrastructure.